Everything Digital Money Can Do – and What it Can’t

Digitalization affects all sectors – and monetary transactions are no exception. But can digital money such as bitcoin really be considered currency? And how digital have traditional currencies already become? G+D provides answers for the payments of today and tomorrow.

The basic concept is still plausible. During the 2008 global financial crisis, confidence in state institutions was shaken to such an extent that the popularity of the bitcoins introduced shortly before the crisis quickly skyrocketed. People often speak of bitcoin as a new “digital currency” that will go as far as replacing cash – but it will not come to this. Although anyone can buy bitcoins and even use them to make payments in various countries or on the internet, the commonly-used concept of a new “currency” is misleading because the term should be reserved for money that is backed by a central institution such as a central bank.“That is not the case with bitcoin,” explains Florian Gawlas, Technology Director at G+D Mobile Security. “Furthermore, bitcoin is used mainly as a digital investment in the hope of a good increase in value. Because of the underlying group of users who rely on this money, we refer to it as Digital Community Money – DCM for short – and not digital currency.”In this case, the “community” consists of people from all over the world who have bought bitcoins, which are based on the underlying blockchain technology.

The revolutionary aspect here is that it removes the payment process from the structure of the established financial system.

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Florian Gawlas, Technology Director at G+D Mobile Security

“The revolutionary aspect here is that it removes the payment process from the structure of the established financial system,” explains Florian Gawlas. “There is also a technical difference, since with blockchain technology, accounts are not stored centrally in a bank, but are instead replicated on multiple computers. Any private individual can operate one of the computers in the network.” In total, there are almost 1200 DCM of this type in the digital world, which differ considerably in terms of their market capitalization. The following example shows that bitcoin will probably never be suitable for everyday use: If we assume that all businesses in a country such as Germany suddenly begin accepting bitcoin as a payment method, this digital money would soon be overburdened. “The total money supply is much too small; at the moment, the bitcoin blockchain is at full capacity at 3 to 4 transactions per second. That is not even enough to keep the supermarkets going in a small German town. Therefore, as things stand, bitcoin does not fulfill the technical prerequisites to function as a mass payment method,” says Gawlas. By way of comparison, credit card provider Visa facilitates many thousands of transactions per second. A further disadvantage of bitcoin is that its value cannot easily be calculated. For example, between March and mid-October 2017, it fluctuated between around 1,000 and almost 6,000 US dollars. Consequently, although the idea of creating a monetary system that lies outside of the established financial system has romantic appeal, implementing it on a mass scale simply is not yet practicable.

Credit: Paul Paladin

Digital Currencies Will Not Quickly Replace Cash

Nonetheless, the extent to which digital currencies could represent at least a practical supplement – in a regulated form with a central bank in the background – has come under consideration time and time again. However, the goal is not to eliminate cash, but rather to some degree to offer an additional service. The Swedish Riksbank is currently working on a project investigating the possible implications of a digital currency, or e-krona, for society and the economy. “However, there is no intention of replacing cash with it,” says Tilo Fritzhanns, Director Business Development at G+D Currency Technology. “Utimately, citizens will decide whether they can trust a digital currency. And that is where cash still scores very highly.”

Utimately, citizens will decide whether they can trust a digital currency.

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Tilo Fritzhanns, Director Business Development at G+D Currency Technology

There is also a further problem to consider; namely the need for a veritable tectonic shift in the financial system. “Some states are also skeptical about digital currencies because they could weaken the position of commercial banks.” Traditional banking transactions would then be completed to an increasing extent via the central bank, which could lever important filter functions out of the commercial banks. “That would leave the current multi-level financial system on the scrapheap, which is not in the interests of any country,” says Fritzhanns.

Analog and Digital Worlds United

Fast transfers with Instant Payment

Digitalization has already produced several examples of how the “old” and “new” worlds can best be combined; for example, the traditional production line in a car factory can be upgraded to Industry 4.0 standards using smart technology. When it comes to cash, the solution may lie in the interplay between proven systems and new features. The only question is: What are the benefits of digital money? Of course, it allows transfers to be made in seconds – even from mobile end devices – making the eCommerce sector faster. Payments would reach online shop operators almost at the same time as the order. However, a digital currency is not necessary to achieve this, since it is already possible to some extent with our traditional financial system. “Instant payment is also an interesting alternative because it feels like a digital currency to end users, but is not associated with the same economic risks since it is based on established monetary systems,” stresses Tilo Fritzhanns.

Pioneer USA and Scandinavia

“Instant payment” is already in place in the USA and Scandinavia. This means that bank transfers can be completed in just a few seconds. In Europe, the intention is to use the SEPA standard to circumvent market fragmentation. A SEPA transfer takes one working day, while the SCTinst tool derived from this system allows payments to be made in 10 seconds – and this may drop to as little as 2 seconds in the future. EBA Clearing will launch an instant payments platform in November 2017, with the European Central Bank set to follow suit a year later. In the period until these systems are available for use, various FinTech companies such as PayPal, are attempting to close this gap in the market. “Third parties such as these position themselves between banks and customers,” explains Maria Veleva, Product Manager for Financial Service Solutions at G+D. By contrast, Veleva advises banks to provide their own products and continue ensuring customers can contact their banks directly without needing to work around third-party applications. Since “G+D is the world’s leading security partner”, the company offers support to financial institutions in this regard.

When Machines Pay Each Other

In the meantime, a new area of application has emerged for digital money. As Industry 4.0 has taken root, new applications for Digital Community Money have opened up. The community in question does not consist of people buying bitcoins, but rather of machines communicating with each other – and paying one another for their services. In times when autonomous driving is possible, smart machines are proving just as competent in regulating accounting procedures independently.

“Of course, the demands on money used among machines differ from those used by humans, and will therefore take a little getting used to within society,” says G+D’s Tilo Fritzhanns. “However, we do see real prospects for digital money in the IoT sector, since it involves many amounts in the cent and subcent ranges, which need to be transferred rapidly. In that scenario, having an internal system makes sense.” For example, pay-per-use models would be easier to implement if an industrial company did not buy a machine, but simply paid its manufacturer when the machine is actually in use. The exchange takes place via a Machine-to-Machine (M2M) connection, which provides data and regulates the digital payment at the same time. “Requirements have simply changed in the IoT sector,” says Fritzhanns. “We want machines to become more autonomous, and this also includes machines being able to complete payments among themselves.” However, even these payment methods are not necessarily going to replace cash and our traditional financial system. Rather, the long history of cash shows that multiple variants can coexist – and the amount of cash in circulation is actually continuing to grow. So the end of the banknote is not in sight – it’s just getting some smart, digital siblings.

Bitcoin? In a Way, the History of Money is Repeating Itself

And as is the way with siblings, there are some similarities. One of the main ones is that the value of both banknotes and digital currencies is based on confidence. This is clear if we look at the history of money, with which hardly any company in the world is more closely connected than G+D. Founded in Leipzig in 1852, the company came into being in the middle of the Industrial Revolution and the advent of paper money in Europe. Just two years later, G+D printed the first banknotes for the Weimarische Bank, which was not even ten years old at the time, but was permitted to issue its own cash. “People went to the bank and exchanged their good gold for a piece of printed paper,” explains Astrid Wolff, who manages the G+D’s company historical archive. “This was a real, far-reaching cultural transformation – especially when you consider that the banknote was not yet legal tender in the German Reich until shortly before the First World War. This means that nobody was obliged to accept banknotes. After all, the Reichsbank only honored notes that it itself had issued, but did not guarantee those issued by private banks.”

The first printed banknote by G+D

The first printed banknote by G+D

For this reason, people today exchanging US dollars or euros for bitcoins that have not even been around for ten tears and that are not backed by any regulatory authority is as exciting as the radical change that took place almost 170 years ago. “In those days, banknotes were already a virtualization of money, since the material used to make them no longer represented an adequate equivalent value,” says Wolff. “It finally became a mass medium by the end of the First World War, since by then, banknotes were also available in smaller denominations. Despite hyperinflation in the 1920s, confidence in banknotes has not wavered since then.” We therefore now find ourselves at a cultural threshold reminiscent of that faced in 1850. However, it remains to be seen how confidence in digital money will develop.

Think Tank Digital Currencies

New Thinktank

G+D wants to continue to drive this development itself, and has founded a cross-sectoral Thinktank to this end. “As with all major business and economic topics, we are working together in an interdisciplinary approach to be able to offer new services, and develop existing services through broader expertise and solid analysis,” explains Head of Strategy Philipp Schulte. “After all, the future of cash is and remains a central issue that we want to shape for ourselves and our customers.”

Giesecke+Devrient Press Team

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